Rackspace, the Texas grown leader in cloud computing warned Wednesday before Texas Senate committee that the state’s business tax is pushing its expansion and perhaps the whole industry elsewhere.  Rackspace Hosting, which was founded in San Antonio in 1998, opened data centers last year in Virginia and Illinois because of how the state’s margins tax is applied to its Internet-based business, company representatives testified to the Senate Finance Committee.

The main issue is that Rackspace is facing is whether a company is taxed where its data centers are located or where its customers are. In Rackspace’s case, 90 percent of its customers are out of state, but the state applies its business tax to its data centers in San Antonio and Grapevine. “That puts us at a competitive disadvantage” with data centers outside Texas that don’t pay a margins tax, Rackspace lawyer Alan Schoenbaum testified.

For example, when Rackspace locates a $100 million-plus data center in Texas , Schoenbaum said, the company pays eight times in sales tax for the equipment over what it pays in margins tax. Texas officials like to brag about the state’s business-friendly climate, but Schoenbaum said the company’s taxes in Virginia, which has an income tax, are a third of its taxes in Texas.

Schoenbaum later told the State Senate Committee about future Rackspace cloud expansions, “We won’t be in Texas unless the law is changed.”

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